Act Fast While This Market Dominator is Still on Sale
Diverging monetary policy at the world’s largest central banks and faster economic growth in the United States have wreaked havoc on currency markets.
While the Federal Reserve is expected to announce an interest rate hike today following the conclusion of its two-day meeting, the European Central Bank (ECB) recently extended its historic bond-buying program through at least December 2017 and lifted the restriction on buying bonds yielding less than the deposit rate.
The ECB’s dovish policies — combined with sluggish European growth and the rebound in the U.S. dollar, which has jumped 10% from its low this year — are strengthening calls for euro-dollar parity. If that happens, it would be the first time the two currencies have traded on a 1:1 basis since 2002.
Sales at U.S. companies have taken a hit on dollar strength over the past two years, and euro weakness is more bad news for domestic companies that export to the EU. Goods will be relatively more expensive as the euro weakens, and sales will fall when translated from euros into the stronger dollar.
But European companies selling into international markets could see the opposite effect, getting a boost when translating sales abroad into the weaker local currency.
I’ve found a company that will benefit from this currency tailwind and also just closed a major deal that makes it nearly unstoppable in its industry. What’s more, I plan to take advantage of a recent pullback in the shares with a strategy that could net traders a double-digit annualized return.
Mega Merger Makes This Beverage Giant Even Stronger
Headquartered in Belgium, Anheuser-Busch InBev (NYSE: BUD) is the world’s largest beer maker and owns seven of the top 10 global beer brands. In October, the company finalized one of the largest mergers in history — a $100 billion deal to take over SABMiller.
This week, BUD announced the sale of some European beer brands to the Asahi Group of Japan for $7.8 billion in a move to clear regulatory hurdles for the merger. The sale follows others by both InBev and SABMiller that have fetched nearly $25 billion — a quarter of the takeover price — and has allowed the combined company to exit from slower-growth brands in Europe and elsewhere.
The combined company books just 13% of its sales within Europe, while 67% of sales come from North and South America. Sales in faster-growing markets, especially in Latin America, could give the company a boost as those revenues are converted into weaker euros.
Management has also identified nearly $1.4 billion in cost synergies that can be realized on the merger.
Following the deal, Anheuser-Busch InBev is expected to control 28% of the global market, nearly triple the market share of its closest rival. It will also dominate some of the largest markets. For instance, according to Morningstar, the combined company will control nearly 70% of the Brazilian beer market (the world’s third largest by volume) and almost half of the U.S. beer market (the second largest).
Stable cash flows, with over $9 billion in free cash flow last year, and market dominance in an industry not prone to the economic cycle puts BUD on my radar any time the shares hit value territory. And the stock has fallen roughly 20% since October on fears of integration risk with SABMiller.
The recent merger brings some integration uncertainty, but the combined company could create an unstoppable cash machine in the consumer space. I believe shares, which are trading near two-year lows, will soon bounce on greater efficiencies and a boost to the company’s euro-denominated financials.
BUD also throws off a nice 3.3% dividend yield, but traders will have to wait until April to collect the next bi-annual dividend payment. For those interested in generating income on the position immediately, there is an alternative income strategy.
It’s an entry-level options strategy known as selling a covered call, and it’s perfect even for beginners. In fact, some beginners have used it to pocket as much as $3,000 a month. If you’re not familiar with this incredibly lucrative strategy, you can watch a 90-second tutorial here.
With shares of BUD trading at $105.05 at the time of this writing, we can buy 100 shares and simultaneously sell one BUD March 110 Call, which is trading around $3.25 ($325 per contract). This lowers our cost basis to $101.80 per share, which means BUD could fall more than 3% before we’d experience a loss on the position.
If BUD closes above the $110 strike price at expiration on March 17, our shares will be sold for that price. In this case, we will make $4.95 in capital gains, plus the $3.25 option premium for selling the call. That gives us a total profit of $8.20 per share, for a return of 8.1% over our cost basis of $101.80. Because we’d earn that in 94 days, the annualized return works out to 31%.
If shares fail to rally to the $110 strike before expiration, that’s not a problem. I think BUD is a great long-term pick, and we can continue to sell call options to generate more cash on the position.
And if you’re interested in learning how even beginners are pocketing an extra $3,000 a month with covered calls, you can get more information here.